Not all that long ago, we did an article addressing a legal concept called breach of fiduciary duty. In this context, we turned to California jury instructions for insight into what fiduciary duty is, who has it, and when it applies.
In summary, any one acting as a/an agent or stockbroker, real estate agent or real estate broker, corporate officer or partner/ has a legal obligation called a fiduciary duty to someone who has placed his or her trust in them. This is generally a principal, client, corporation or partner. This means that the person or entity with the fiduciary duty must act “with the utmost good faith in the best interests” of any such principal, client, corporation or partner.
In this article, the Los Angeles business attorneys from the Law Office of Parag L. Amin P.C., or LawPLA, explore this concept in greater detail. Specifically, we’ll take a look at what fiduciary duties business partners in California owe to one another.
Do all LA business partners have fiduciary duties?
In California, two laws govern partnerships. These are the Uniform Limited Partnership Act of 2008 and the Uniform Partnership Act of 1994. Among other things, these laws specify which partners have fiduciary duties, and the nature of such duties.
Fiduciary duties in California partnerships
Legally, a partnership is a business entity that is separate from its partners. It is formed when at least two people known to one another act as co-owners a business for profit – regardless of whether they intend to create a partnership.
In this type of partnership, all partners have fiduciary duties to the partnership and to one another. These are a duty of loyalty and a duty of care, which must be exercised in the ordinary course of business, and/or the “winding up” of the partnership.
Fiduciary duties in California limited partnerships
With certain exceptions, a limited partnership is legally defined in California as a business entity with at least one general partner and at least one limited partner created in accordance with the Uniform Limited Partnership Act by at least two people, or one which becomes subject to applicable law as the result of a merger or conversion.
In most cases general partners usually make other contributions, and have no say in routine management or operations.
In a limited partnership, the general partners owe fiduciary duties to the limited partnership and to one another. These are a duty of loyalty and duty of care. General partners must exercise these duties during the regular course of business and/or the “winding up of the partnership business.
However, limited partners do not have fiduciary relationships to the limited partnership or to any other partner just because he or she is a limited partner. There is a catch though. This stipulation no longer applies if a court determines that a limited partner is acting or has acted as a general partner by taking an active role in the daily management or operation of the business.
What are a fiduciary duty of loyalty and a fiduciary duty of care?
As set forth in both the Uniform Limited Partnership Act of 2008 and the Uniform Partnership Act of 1994, the duty of loyalty for both partners and general partners mandates that they:
- Report to the limited partnership/partnership and hold as a guardian for it any property, profit, or other such benefit obtained by the general partner/partner in the conduct and winding up of the limited partnership’s activities; or drawn from a use by the general partner/partner of limited partnership/partnership property.
- Avoid dealing with the limited partnership or partnership in the conduct or winding up of the relevant entity’s activities as or for a party with opposing interests.
- Abstain from acting as the limited partnership’s/partnership’s competitor in the conduct or winding up the relevant entity’s activities.
The duty of care for both partners and general partners mandates that they:
- Do not engage in “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” in the “conduct and winding up” of the limited partnership’s/partnership’s activities.
Acting in accordance with the obligation of good faith and fair dealing
The state laws governing Los Angeles business partnerships also stipulate that general partners and partners exert rights provided by law or those set forth in partnership agreements, in accordance with certain obligations. Specifically, they must do so in accordance with the obligation of good faith and fair dealing. But what does this mean?
Basically, this is an obligation or duty to be honest, and demonstrate good faith and fairness to one another while conducting business as partners. This obligation takes effect upon creation of the partnership and remains in effect until the business is sold or dissolved. Accordingly, the obligation of good faith and fair dealing is the bedrock for all the other fiduciary duties in a California partnership.
A brief note about effect of partnership agreements on fiduciary duties
Last but not least, we must talk briefly about if or how partnership agreements affect the fiduciary duties that partners have to one another and the partnership. Both Acts we have detailed above address this topic.
In this, it is context it is important to note that partnership agreements for either a general partnership or limited partnership cannot:
- Eliminate the duty of loyalty specified by law
- “Unreasonably reduce” they duty of care specified by law
- Eliminate the obligation of good faith and fair dealing specified by law
However, the agreement may – if deemed reasonable – classify actions that do not violate the duty of loyalty. It may also identify performance standards for the obligation of good faith and fair dealing, as long as they are not “manifestly unreasonable.”
Contact Los Angeles business partnership lawyers now
At LawPLA we have the skills and experience necessary to address any questions or concerns about your business partnership. If you believe a business partner violated his or her fiduciary duties, or you have concerns about carrying out your own fiduciary duties, we may be able to help. The only way to find out for sure is to schedule a consultation with our knowledgeable California partnership attorneys. You can do that by completing the form on our contact page, or calling one of our conveniently located Los Angeles offices.